International Trade Homework

FINC/ECON 3240 - International Finance

Homework Solution

Chapter 1

2. Comparative Advantage.

a. Explain how the theory of comparative advantage relates to the need for international business.

ANSWER: The theory of comparative advantage implies that countries should specialize in production, thereby relying on other countries for some products. Consequently, there is a need for international business.

b. Explain how the product cycle theory relates to the growth of an MNC.

ANSWER: The product cycle theory suggests that at some point in time, the firm will attempt to capitalize on its perceived advantages in markets other than where it was initially established.

4. International Opportunities.

a. Do you think the acquisition of a foreign firm or licensing will result in greater growth for an MNC? Which alternative is likely to have more risk?

ANSWER: An acquisition will typically result in greater growth, but it is more risky because it normally requires a larger investment and the decision can not be easily reversed once the acquisition is made.

b. Describe a scenario in which the size of a corporation is not affected by access to international opportunities.

ANSWER: Some firms may avoid opportunities because they lack knowledge about foreign markets or expect that the risks are excessive. Thus, the size of these firms is not affected by the opportunities.

c. Explain why MNCs such as Coca Cola and PepsiCo, Inc., still have numerous opportunities for international expansion.

ANSWER: Coca Cola and PepsiCo still have new international opportunities because countries are at various stages of development. Some countries have just recently opened their borders to MNCs. Many of these countries do not offer sufficient food or drink products to their consumers.

7. Benefits and Risks of International Business. As an overall review of this chapter, identify possible reasons for growth in international business. Then, list the various disadvantages that may discourage international business.

ANSWER: Growth in international business can be stimulated by (1) access to foreign resources which can reduce costs, or (2) access to foreign markets which boost revenues. Yet, international business is subject to risks of exchange rate fluctuations, and political risk (such as a possible host government takeover, tax regulations, etc.).

8. Valuation of an MNC. Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently increased. Hudson's best guess of its future peso cash flows to be received has not changed. However, its valuation has declined as a result of the increase in political risk. Explain.

ANSWER: The valuation of the MNC is the present value of expected cash flows. The increase in risk results in a higher expected return, which reduces the present value of the expected future cash flows.

13. Methods Used to Conduct International Business. Duve, Inc., desires to penetrate a foreign market with either a licensing agreement with a foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and return between a licensing agreement with a foreign firm, and the acquisition of a foreign firm.

ANSWER: A licensing agreement has limited potential for return, because the foreign firm will receive much of the benefits as a result of the licensing agreement. Yet, the MNC has limited risk, because it did not need to invest substantial funds in the foreign country.

An acquisition by the MNC requires a substantial investment. If this investment is not a success, the MNC may have trouble selling the firm it acquired for a reasonable price. Thus, there is more risk. However, if this investment is successful, all of the benefits accrue to the MNC.

14. International Business Methods. Snyder Golf Co., a U.S. firm that sells high-quality golf clubs in the U.S., wants to expand internationally by selling the same golf clubs in Brazil.

a. Describe the tradeoffs that are involved for each method (such as exporting, direct foreign investment, etc.) that Snyder could use to achieve its goal.

ANSWER: Snyder can export the clubs, but the transportation expenses may be high. If could establish a subsidiary in Brazil to produce and sell the